The charts foresee a strong rally in gold prices

Gurumurthy K | Updated on March 10, 2018

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After the market bottomed out in 2015, all the indicators point to a resurgence ahead

Gold prices were in a multi-year downtrend from their all-time high of $1,920 per ounce in 2011. This downtrend, which was in place for more than four years, halted at a low of $1,046 per ounce in December 2015. Since then, the precious metal has slowly regained a bit of its lost lustre, and has surged about 23 per cent to the current levels of about $1,285 by late November 2017. This strong upmove has been in place amid all the chatter about the US Federal Reserve hiking interest rates and other major central banks, including the European Central Bank (ECB) and the Bank of England (BoE), preparing to tighten monetary policy. Does this indicate that the multi-year downtrend in gold prices has ended? For an answer to that, let’s look at the charts.

Medium-term outlook

The rally that began from the low of $1,046 faced resistance around $1,375 in July 2016. Gold witnessed a sharp fall again, which heightened market speculation that prices could fall below $1,000. But the fall was short-lived, and halted at around $1,120 in December 2016, since when prices have climbed up higher again. Though the $1,375 level continues to cap the upside, the fact that gold has sustained itself strongly above $1,200 since February makes it highly likely that prices can breach $1,375 in the coming days. It also strengthens the case that the multi-year downtrend has well and truly ended.

The $1,375 level is very crucial. A break above the immediate resistance level of $1,310 will enable gold to revisit the key hurdle at $1,375. A strong break and a decisive weekly close above this crucial resistance will confirm the trend reversal. Such a break can take the yellow metal higher to $1,415 and $1,450 initially.

A corrective fall from $1,450 targeting $1,400 or $1,370 cannot be ruled out. But a further fall below $1,370 might be less probable.

Gold has short-term support in the $1,260-1,240 zone. The next crucial medium-term support is between $1,190 and $1,180. The bullish outlook for a rally to the $1,450 target will be negated only if gold declines below $1,180 decisively. Such a break—though it is more than a little unlikely—can drag the metal lower to $1,120-1,100 or even lower thereafter.

Long-term outlook

The price action since 2014 indicates the formation of an inverted head-and-shoulder pattern on the chart. This is a reversal pattern that is formed at the end of a downtrend; after that, it only moves up.

The neckline resistance of this pattern is also poised around $1,375. A strong monthly close above that will be the first sign of confirmation of this pattern breakout. A decisive close above $1,400 will confirm the same. This will make the $1,400-1,375 zone a strong support base going forward and will limit the downside if the price falls after an initial rally to $1,450. A fresh leg of upmove is expected to begin at the $1,400-1,370 support zone after the corrective fall from $1,450 and will have the potential to target $1,520 initially. A further break above $1,520 will increase the likelihood of gold targeting $1,560 or even $1,600 over the long term.

The region between $1,070 and $1,050 is a key long-term support for gold. The bigger picture will turn negative and the threat of gold testing and falling below $1,000 will emerge only if it declines below $1,050 decisively.

Gold-silver ratio

One major indicator, widely tracked in the market to determine where bullion prices are headed, is the gold-silver ratio, which is the ratio of the price of gold to the price of silver. Given the current prices— gold $1,285 per ounce and silver $16.5 per ounce—the gold silver ratio is 77.87. That number is the amount (in ounces) of silver required to buy one ounce of gold.

In general, the gold-silver ratio movement is inverse to the movement in gold and silver prices. In other words, when the prices of gold and silver decline, the ratio increases and vice versa.

However, there are instances when both gold prices and the ratio have moved in the same direction. Interestingly, in these instances, gold has outperformed silver. And this is what is perhaps likely to happen in the coming months. Why is that?

The gold-silver ratio has been range-bound between 74 and 78 since July, with a bullish bias for it to breach 78 and rally to 82 or even 83 in the coming months.

Global spot silver, currently trading at $16.5 per ounce, has strong support between $15.5 and $15. The price is unlikely to decline below $15 and can sustain itself well above this support going forward. There is strong resistance at $18.3. A decisive break above this hurdle will pave the way for a fresh rally to $20.5 and $21 in the coming months.

A BusinessLine analysis of gold prices, as derived from the forecast made on the gold-silver ratio and silver prices, suggests that gold is likely to sustain above $1,200 and silver above $15. As the ratio rallies to 82 or 83 and silver prices move up to $20 or $21, gold can outperform silver by witnessing a sharp rally targeting $1,600.

Published on December 11, 2017

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